5 Hidden Ways That Globalization is Changing

Globalization has been a powerful force in shaping modern human history.

The world economy has become increasingly connected and interdependent over recent decades, and conventional wisdom suggests that this will only continue in the years ahead.

But while it’s tempting to extrapolate the past effects of globalization into the future, such a leap may also be a mistake. That’s because there is growing evidence that globalization itself is quietly transforming – and how it ultimately evolves may be markedly different from what most business leaders might expect.

How Globalization is Changing

Today’s infographic highlights the most recent research about globalization from the McKinsey Global Institute, the business and economics research arm of McKinsey & Company.

Below are five major shifts that have gone mostly unnoticed, as well as the countries and companies that could benefit:

The findings of the report show that globalization is not static or constant, and that structural changes in the nature of globalization have been occurring in the background over the last decade or so.

The impact that these shifts could have on the global economy is substantial: international trade already adds up to $22.4 trillion each year, or about 28% of global GDP. Even a minor change in this paradigm could affect the list of countries, corporations, and workers that stand to benefit.

The 5 Ways Globalization is Changing

The report looks into 23 different industry value chains in 43 different countries, representing 96% of global trade.

From that comprehensive data, five major structural shifts have been identified:

1. A smaller share of goods is traded across borders
Trade is still growing in absolute terms, but a smaller share of the physical goods made worldwide is now being traded. More specifically, during the span of 2007 to 2017, gross exports as a percentage of gross output decreased from 28.1% to 22.5% globally.

2. Services trade is growing 60% faster than goods trade
When we think of trade, we often focus on the trade of physical goods (i.e. autos, aerospace, oil). However, services are becoming increasingly important to the global economy – and if accounted for properly, it’s possible that the value of services is closer to $13.4 trillion, which is higher than the total goods trade.

3. Labor-cost arbitrage has become less important
It’s a common perception that trade flows are driven by companies searching for low-cost labor. However, in value chains today, only 18% of the goods trade is based strictly on labor-cost arbitrage.

4. R&D and innovation are becoming increasingly important
Companies are spending more on R&D and intangible assets such as brands, software, and IP as a percentage of overall revenue. This spending has increased from 5.4% to 13.1% of revenue over the period of 2000-2017.

5. Trade is becoming more concentrated within regions
The geography of global demand is changing as emerging markets consume a higher percentage of total goods. Since 2013, intraregional trade has increased by 2.7 percentage points – a reverse from the longstanding trend.

The mix of countries, companies, and workers that stand to gain in the next era is changing.

– McKinsey Global Institute

Why These Changes Matter

What types of countries are likely to benefit from these shifts, and which will face headwinds?

Type of economy

Possible opportunities or challenges

Advanced economies

Strengths in innovation, services, and highly skilled talent put advanced economies in a strategic position to benefit from changes in globalization

Developing economies with close proximity to large consumer markets

As production moves closer to consumers, developing economies in close proximity can take advantage

Developing economies that are less connected

The window is narrowing for low-income countries to use labor-intensive exports as a development strategy

Policy makers and business leaders must understand how the trade landscape is shifting so they can prepare for globalization’s next chapter and the opportunities and challenges it will present.

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Author

Jeff is the Editor-in-Chief of Visual Capitalist, a media site that creates and curates visuals on business and investing. He has been quoted or featured on Business Insider, Forbes, CNBC, MarketWatch, The Huffington Post, The World Economic Forum, and Fast Company.